Final answer:
The insured can assign 100% of the ownership of a life insurance policy. The actuarially fair premium would be $2,000 for individuals with a family history of cancer and $500 for those without it. If the company charges the fair premium to the entire group, it risks adverse selection and potential financial losses.
Step-by-step explanation:
An individual insured under a life insurance policy has the ability to assign 100% of the policy ownership. This can be done for various reasons, including transferring the rights and benefits of the policy to another person or entity.
Turning to the example provided regarding 50-year-old men, actuarial fairness in insurance premium calculations is a critical component. Let's calculate the actuarially fair premium for each group and for the group as a whole:
- Group with family history of cancer (20% of 1,000 men): The annual mortality probability is 1/50. Hence, the expected payout per person is 100,000 * (1/50), which equals $2,000. Therefore, the actuarially fair premium for this group would also be $2,000.
- Group without family history of cancer (80% of 1,000 men): The annual mortality probability is 1/200. The expected payout per person for this group is 100,000 * (1/200), which equals $500. Accordingly, the actuarially fair premium for this group is $500.
- For the entire group: We can calculate the weighted average of the two groups' premiums because the insurance company cannot differentiate based on family history. The combined fair premium would be the sum of (0.20 * $2,000) + (0.80 * $500), which equals to $700.
If the insurance company tried to charge the actuarially fair premium to the group as a whole, it would likely face adverse selection. This occurs when individuals with higher risk are more likely to purchase insurance at a particular price than those with lower risk, potentially leading to financial losses for the insurer.